|Where it all began|
The work leading to the Real Incomes Approach started in Rio de Janeiro, Brazil in 1975. Initially focusing on the impact of the petroleum crisis on the Brazilian economy. Some of this initial work made use of the resources provided by the Getulio Vargas Foundation located in Botafogo, Rio de Janeiro.
The Real Incomes theory and policy propositions emerging from this work have since become a new front in macroeconomic policy analysis, constitutional & development economics.
In the second article in this series I reviewed the mis-match between conventional macroeconomic theories and policies and the objectives laid out under Agenda 2030. There is a major issue in the lack of coherence between project objectives and the operational macroeconomic frameworks. Agenda 2030 bases the assessment of levels of achievement of Sustainable Development Goals on national or macroeconomic level SDG indicators. All changes that address deficits or gaps, however, take place at the microeconomic or project level. It is self-evident that overall coordination is required to ensure projects address the national level issues and economic policy should not constran this process but should promote it.
In this third part of this series on "Economic Policies for Agenda 2030" I set out the economic policy issues and how we have been advancing the theory and policy propositions to enhance the contribution of macroeconomics to microeconomic productivity. This economic policy development programme started in 1975 and has continue to date. The approach, RIO-Real Incomes Objective, is the real incomes approach to economics able to contribute to the development of more effective Agenda 2030 project portfolios.
In the second part of this series, the state of play of our contributions to avancing information technology solutions to this issue were described.
The Agenda 2030 concept
The model of Agenda 2030 is a set of objectives which describe the way we wish the world to be or, at least, the direction in which were want to move. This demands that all projects and economic activities deliver to society contributions towards the overall objectives. Wher we want to go appears to be clear but the procedures and organization on how we get there is less clear.
This very same issue was addressed by Roger Kaufman several years ago. However, Kaufman came up with a procedural analysis known as Organizational Elements Method (OEM) in 19881 and he set out a global objective, which he called "Mother's rule" (MR) in 20032. This title refers to a list of conditions which all mother's would wish for their children, I think we can safely assume Agenda 2030 Sustianable Development Goals can be classified as such. The OEM is a way to map out the necessary activities to deliver outside the private economic activity the objectives of MR or, in the case in point, SDGs.
Just as in the case of project planning, Kaufman's OEM is a map of corporate activities and input-ouput (I/O) relationships. However, the objective was never an exclusive focus on the "bottom line" or maximization of financial return or shareholder value but the objectives included selected items in the MR list or, in our case, SDGs. Therefore Kaufman's OEM approach is a model of the required approach to line up microenterprise performance to the macroscale objectives.
A complemenary requirement to making a success of the OEM approach is to apply decision analysis to the process of designing the project or corporate production system. Since 1986, SEEL has worked on the decision analysis approach devised by Ronald Howard of Stanford University which complements Kaufman's approach by enabling designers to identify the most productive options by using decision analysis models to investigate the trade-offs between different potential solutions and the differential impacts on pre-defined objectives. The challenge to policy makers is to create an economic policy framework that can accommodate the very wide range of conditions and states of companies and the constituents employed by them as well as the self-employed and even subsistence producers.
The modern economy and dualistic disequilibrium
A recap on economic theory and policy
Before any notions of majority participatory democracy existed, rulers relied on wealthy traders, and later banks, to pay for initiatives of rulers, based on loans and which were usually paid back from the proceeds of taxation of the populous. The early expansion of colonialism was based on a charter system where royalty gave businessmen charters or rights to use land in foreign parts and military protection against indigenous people, in exchange for money raised through taxation of the activities of the colonial population. Later governments exercised a process of revenue-seeking based on different types of taxation.
After many centuries, these same methods of raising money remain intact. However, constitutionally, many countries have transformed into democracies with universal suffrage only being achieved during the 20th century, that is, with all constituents having the right to vote.
Dividing constituents into economic and social constituents we find everyone has an economic activity where we take on the role of economic constituents and all have personal pursuits and interests as social constituents. The right to vote lies in the hands of social constituents but it is denied to groups or companies that group economic constituents into economic activities as owners, managers and employees. However, the decision making governing monetary policy remains distant from any effective public choice exercised by social constituents even although public choice is a central notion of the operation of a constitutional economy.Where do the funds used to consume output come from?
|Production, Assessibility & Consumption Model|
If there was no money the basis of exchange would be barter in which products resulting from economic activities would be exchanged. Here the expression of consumption is only in terms of products consumed. With the existence of money as a medium for exchange it becomes easier to match requirements by spending only that amount of money requested in an exchange. However, the levels of consumption still remain as a function of production because the disposable funds for consumption are the aggregation of disposable incomes of constituents, most of which is paid in return for contributions made, as employees of production and service activities. Economic growth in this system based on supply side money (endogenous funds) comes from savings that are invested in more productive activities leding to falls in unit costs and in many cases moderation any price setting of outputs while affording employees higher incomes.
Jean Baptiste Say
As a result of the trend towards lower unit costs, and market penetration resulting from more competitive prices,a rising share of employee wages results a raised purchasing power of of the increased real output leading to a positive realincomegrwoth across the economy.
It is worth noting that this explanation of how an economy rotates funds through the constituency was proposed by JeanBaptiste Say, the French economist in 1803 in his "A Treatise on Political Economy or The Production, Distribution and Consumption of Wealth"
, and, in his correspondence with Malthus, he was careful in his stepwise explanation of the logic of his position. It should not be overlooked that, unlike many economists, Say was also an industrialist employing at one time around 500 people. From consumption to demand
As from around 1975 with the onset of the global slumpflation crisis initiated by the steep rises in the international price of petroleum, the role of financialization took hold of financial intermediation services along with a massive expansion in a grey market of derivatives and options which by 2007 was larger than whole economies. With this transition the notion of consumption being largely under the control of payments made to constituents by supply side activities was replaced by "demand" not as a quality of earned income but as an influx of money generated externally to the supply side cash flow (exogenous money). The post-1975 advance of economic policy making was associated with the removal of many financial regulations inposed post-1929 to avoid the risk of another financial crisis that arose as a result of excessive funding of speculative activitie applying exogenous funds. Since 1975 the levels of exogenous funds pumped into the economies by central banks has expanded. Alongside the "policy instrument" of money volume the other policy instrument is the setting of base interest rates.
The assumptions of this policy framework are that raising money volumes raises inflation and lowering the rate of money supply, will reduce inflation whereas interest rates are another device to control inflation with high interest rates lowering inflation and low interest rates helping raise "demand" and eventually inflation.The Aggregate Demand Model
This basic two lever macroeconomic policy is known as the Aggregate Demand Model (ADM) which attempts to balance economic growth and employment against inflation. Because monetary policy which has come to us through time from an age where there was no scrutiny of this policy by electorates, since there was no democracy, it is paradoxical that even today where those countries that have universal suffrage, there is still no scrutiny of monatary policy by voters. As a result this macreconomic policy has continued without any corrections. During the last 20 years it has gradually become apparent that the rising volumes of money supply and the variations in interest rates have not avoided a depletion of the disposable incomes amongst constituents for consumption while the economies have "grown". However, what has grown is not growth in physical real products and services but rather a massive inflation in land prices, real estate prices, precious metals and shares of companies. As a result what the monetary policy planners are pointing to as increased economic growth and "demand" has no connection to the real economy and the plight of constituents. This is because most of the asset holders who have benefited from rapid price rises of their assets, make up a tiny minority of constituents in each country, including high income countries.
One of the notable factors is that for many years monetarists explained ADM policy decisions by using the so-called Quantity Theory of Money (QTM) which is a formula that does not contain the variables of savings or of assets which represent non-circulating money. With quantitative easing combining massive rises in money supply and interest rates close to zero, these exogenous funds have not generated "demand" or inflation because they have by-passed the supply side economy and flowed into asset markets. Savings, on the other hand have been killed off by low interest-rates. Naturally using the QTM to plan such a policy would not have predicted that this would happen and result in a depressed real economy, real income levels and declining investment. A technical/economic explanation of this groundless monetary theory is contained in the document published by the Development Intelligence Organization (See, A Real Money Theory
). This significant gap in monetary theory and practice has continued to this day because of a reliance on a flawed QTM model, still taught in university economics courses to this day, was never subjected to sufficient scrutiny by voters or indeed, political parties. This font of wisdom hovered somewhere within the depths of central banks and in the publications of "independent" think tanks whose benefactors are the financial services sector.
John Maynard Keynes
It is worth pointing out that Keynes did not consider money supply had any direct effect on inflation and our own work explained the mechanism for inflation back in 1976 which is its strict dependence on the price setting decisions by individual companies. Where companies can invest to raise productivity they can become price-setters and penetrate the market and grow irrespective of the supply of money to the economy. Milton Friedman a promoter of monetarism could never explain the mechanism whereby money supply increases inflation in goods and services and his "explanation" was that "... this happens in the long run
". Which of course, is not an explanation of the mechanism. Goods and services are produced by the supply side economy for any explanation of inflation in their outputs requires a detailed analysis of the impact of money volume on these acivities. Our development work since 1975 has never found any determinant relationship to explain how this might happen.
There is a specific instance, which we studied as from 1975, concerning Brazilian hyper-inflation. In this case, the cost-push inflation caused by a rising petroleum prices resulted in declining demand and declining cash flow fo companies using petroleum or petroleun derivatives. With inflation there was a fall in the real value of corporate cash flows. Therefore in a desparate attempt to maintain the real value of cash flow and purchasing power, companies pre-emptively raised unit prices to try and stay ahead of the inflation and maintain the real value of their cash flow. Therefore, this stepwise raising of prices had a logical economic explanation.The attack on Say's Law
While financialization has progressed, the essential concept of consumption being dimensioned by constituent disposable income, as proposed by Jean Baptiste Say, associated with "Say's Law", which in a simplist format states "Production creates it own consumption", has come under widespread criticism from monetarists and Keynesian economists. Their counter argument, to refute Say's Law, is to state production is in response to "demand" which they align with exogenouse money and increasing debt. I must admit that at universities, economics lecturers tend to spend only a few minutes on Say's work, no more than a passing reference, it is treated as a sort of oddity. There is a failure to dwell on it's implications for our current monetary framework. The weak monetary theory that lacks useful outcomes never seems to bother universities who continue to teach this theory and award PhDs for advances in the state of knowledge of a fundamentally flawed theory, which in practice, continues to weaken the economy.
Whereas in certain phases of growth under monetarism, the major growth in economies occurred in the period 1945 through 1975 when monetarism had been tamed by the financial regulations introduced after the 1929 New York Stock Exchange and ensuing depression.There is also no doubt that in general this system has brought millions out of poverty but they system is incredibly inefficient and wasteful of resources. Today we know that Agenda 2030's project portfolio has demonstrated that this modern form of economic "growth" is negatively correlated to income disparity improvements, to sustainbility and effective climate action.
Inflation, declining real incomes, income disparity can all be reduced through increases in productivity on the supply side. However, it is self-evident that a macroeconomic policy based on money supply volumes and interest rates has limited means of impacting productivity in any meaningful way. If we return to the Jean Baptiste Say's model of the economy where growth arises based on the saving and reinvestment endogenous funds, the savings only remain non-circulating while the accumulation of savings is occuring to generate either income or to invest in more productive processes and thereby returning the savings into circulation. It was only in 1976 that the almost complete lack of reference of monetarism and Keynesianism to productivity became evident when a review of basic foundation texts of these approaches were reviewed. The work to establish a solution to slumpflation came up with the Production, Accessibility and Consumption Model (PACM) as a better way to analyse what was going wrong with the economy. It was only many years later, that we realised that this was in reality a Say Model. After all, the subtitle of this treatise of 1803 is, "The Production, Distribution and Consumption of Wealth
It is tragic, although somewhat amusing, to hear monetarists and people who advocate the new moneary theory, even this year, criticising Say's Law each time it is mentioned because their lack of instruction on Say's work shows through vividly and highlights the lack of analytical rigour so typical of monetarism.
Under quantiative easing there are almost no savings and monetarists consider interest-bearing finance, or debt, to be the foundation of growth based on investmnent. As the overall prospects of the economy decline, banks raise their interest rates over the base interest rate by at least 6% and in some cases 12-15% making debt-based investment funds an expensive proposition. Naturally raising the costs of investment makes it more difficult to moderate output prices, especially when quantitative easing is depressing economic prospects.Corporate taxation
For some 25 years, available statistics show that profits, as a share of Gross National Products (GNP), have increased while wages or employee incomes have fallen as a share of GNP. The incentive for company decisions to drive the economy in this direction is linked to corporate taxation and national accounting codes. Profits are the result of the deduction of costs from company revenue. Although owners of companies and shareholders participate in company activities to gain a share of the profit, the income of employees is classified as a cost item. Therefore any decision aiming to maximise profits will have tendency to prevent wages from rising. Even when investments are made to raise productivity, the same negative incentive caused by the cost classification of wages in the accounting code the the use of accounts to determine taxation of profits, result in employee income seldom sharing in the rise in profits their work input has generated. For lower income wage earners, especially in low income countries, this is significant social issue. To add to this predicament, central banks on a worldwide basis maintain a policy of a target inflation rate of around 2% which is equivalent to a currency devaluation of 18% each decade. Clearly, currently under quantitatve easing, official consumer price indices are not reaching this level, but in reality several economies have inflation in excess of 2% so the question arises, why is it that this policy continues when the negative impact on the lowest income constituents of policy-induced rising prices, is self-evident?
This trend is as apparent in high income countries as it is in low income countries. There is a general trend for people needing to work in additional jobs and to work longer hours to maintain their real incomes. As a result, the former preferred distribution of people's time between work, leisure and rest is being force to abandon the daily distribution of eight hours to each activity to one where leisure and rest time is being depleted by work hours increasing from 8 to in excess of 12 or even 16 hours in the day.Democracy, freedom and the rule of law
This erosion in the time available for study and pursuit of personal interests and life objectives undermines personal freedom and the ability to have any effective control on one's own destiny. One of the tenets of constitutional economics, a field advanced by James Buchanan, is that a constitution adopted by the people on the basis of public choice through democratic procedures needs to be acceptable to the state, the population and each individual. Monetarism and Keynesianism hardly qualify as starting points because the "independence" of central banks and dependency of political parties on external funding results in voters having no efffective say over macroeconomic policy decisions. This democratic deficit with respect to policy is a reason the freedom of individuals is increasing suppressed by macroeconomic management and regulatory structures.
But the laws ane regulations are part of the structural causal factors in these unfortunate trends so we end up with the rule of law and regulations not being based on democratic principles or notions of indivudual freedom. Some might call this state of affairs an abuse of human rights, but in the context of constitution, what is going wrong is the expectation that economic policies should be based on due diligence procedures of decision making which actively promote opportunties for people to advance their condition as a basis for improved wellbeing and economic growth. It is, therefore, apparent that the economic frameworks that drive "economic development" are not fully aligned with Agenda 2030 objectives.
As has been stated, monetarism arose as a system centuries ago before universal suffrage and it exists today as an unchanged institution. Thorstein Veblen considered habits of thought maintained instincts of preservation to have become institutions and he considered institutions to have been shaped by the conditions of the past and therefore destined to never in tune with the conditions of the present. The notion of "financial engineering" and the creation of "financial instruments" having something to do with beneficial innovation has tended obscure the fundamental fact that the underlying objective remains the preservation of control over policy in favouring an very small interest group.
Veblen also pointed out the dangers of financialization which he first identified in 1921, long before the New York Stock Exchange Crash of 1929.
Organizational Elements Method: Kaufman, R. (1988). "Planning educational systems: A results-based approach
". Lancaster, PA & Basil, Switzerland: Technomic Publishing Co.2
Kaufman, R., Oakley-Browne, H., Watkins, R., & Leigh, D. (2003). "Strategic Planning for Success: Aligning People, Performance, and Payoff
". San Francisco, Jossey-Bass/Pfeiffer.
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